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Eye of the Gale

Grocers’ technology departments haven’t been spared the effects of the tough economic climate. At the same time, however, technology is one area of retail operations that executives will turn to for solutions when times are tough. The result is that while IT budgets and resources may be frozen or decreased, technology staffers find themselves having to help every other department adapt to the economic Downturn.
Technology’s role in this can range from adjusting a merchandising system to develop value-based assortments, to tweaking price and promotions systems to drive more cost-conscious shoppers to the store, to tightening controls on shrink management solutions to trim costs. In ’s fifth installment of the Executive Insight Series on Technology and the Independent Grocer, almost three-quarters of the retailers surveyed cited the economy as having the largest influence on their business (Table 1).
Fortunately, a good portion of these independent grocers have been able to weather the storm; just under 70 percent were able to grow same-store sales year-to-date, while only16.2 percent said they took a hit (Table 2). The tough economy has clearly had a sobering impact on independent grocers’ expansion plans: Across the board, fewer grocers of all sizes are planning to add stores, and if they are, only a handful will add more than two. Just over 80 percent won’t add any stores at all in the coming year, up from 73 percent in 2007 (Table 3).
Spending on IT was similarly affected. Just under half (47.6 percent) of independents said their IT spending won’t increase in the coming year, while only 36.1 percent said it will increase. As an increasing number of grocers are lowering prices to meet consumers’ tightened budgets, superior service is how they’re looking to stand out from the pack. Service was cited by almost half (46.7 percent) of respondents as their chief point of differentiation, up from 38.6 percent last year.
Price isn’t being overlooked, however, jumping up one to the No. 3 slot, compared with the previous year’s survey, with just under a quarter (24 percent) of those surveyed saying it’s their differentiator. Interestingly, perimeter departments dropped in importance as a key differentiator, named by 18.7 percent of independents, a 1 percent drop from the previous study (Table 4). Other points of differentiation retailers mentioned were locally sourced products, frequent shopper programs, and increased community involvement. One aggressive independent said his strategy was to open stores at locations where larger chains had failed.
Walmart’s still here While Walmart has been named the top competitive threat in each year of this study, their numbers have steadily declined, falling this time from 48 percent to 44 percent. Large chains remain in second place, and are continuing to gain strength by developing more locally relevant concepts, such as Tesco’s Fresh & Easy on the West Coast, which reached 100 stores by year’s end. It didn’t take Walmart long to follow suit, unveiling late in 2008 its Marketside concept, a small-footprint format that focuses on fresh food and enhanced customer service.
Specialty operators such as gourmet food stores – which have traditionally been smaller and locally focused – immediately jumped to the No. 3 slot, though the category is new to the study. This group was cited by 10.7 percent of respondents (Table 5).
The large jump in average number of IT employees – to 4.5 from 1.8 – likely reflects the inclusion of larger operators in this year’s study universe. While three-quarters said they have at least one IT employee, for most that count didn’t extend beyond two people.
One-quarter had no technology employees at all, though the number dropped two percentage points from last year. The numbers of those claiming three, four, and five to 19 IT staffers, which are typically those larger independent chains, all increased headcounts over last year. Four percent said they have 20 or more IT employees, all part of the larger group added to the study this year (Table 6).
While the number of employees among respondents seems to have increased, independents’ plans to hire haven’t changed. Most (83 percent) will maintain their current staff. Only 17 percent say they’ll boost IT staff counts, up just 2 percent from last year. Only 1 percent of respondents plan to decrease IT headcount (Table 6).
Grocery 2.0 While it’s not surprising that back-office applications, point-of-sale hardware and software, and electronic payment systems are most likely being deployed or are currently being rolled out among most independents, what is surprising are the following two largest categories of technology on the list: mobile and wireless applications and Internet-hosted applications.
In last year’s study, 28 percent of independents said mobile and wireless applications would be an important factor for their operations for 2008. This year, 56.3 percent of respondents said they’re currently using or deploying thistechnology today (Table 7a). Wireless in-store technology is particularly growing in popularity, as it can be moved easily from one location to another, without the hassle and expense of rewiring. Wireless point-of-sale systems, for example, come in handy for outside sales during summer.
Most surprising is the number of independents who say they’re currently using or rolling out Internet- hosted applications. When the first issue of Technology and the Independent Grocer was published in 2005, most independents didn’t know what this technology was. In fact, the industry didn’t even have a consistent term for it. (PG used the term “application service provider” back then. “Software-as-a-service,” or SaaS, is the term du jour.) Almost half (47.3 percent) of those independents surveyed are already using them or plan to use them this year. This is due to two key factors: the wider availability of broadband, and the steadily increasing number of software vendors that host their software for retailers to access over the Internet. Many vendors today offer Internet-hosted versions of their applications that are available to retailers on a subscription-based Model.
Among those who don’t use SaaS apps, just over half (52.1 percent) said it’s because they’re not aware of available Internet-based solutions – almost exactly the same percentage as last year. This is surprising, as the use of these applications has been widely marketed by vendors and reported on by both mainstream and trade media.
As Progressive Grocer estimated in past reports, data security concerns and lack of bandwith have dropped as reasons not to use hosted applications, and these drops were significant: In last year’s study, 40 percent of those surveyed were concerned about the security of these apps; for this study, the figure has dropped to 25 percent. Lack of bandwidth concerns saw an even more significant drop – to 6.3 percent this year from 22 percent last year. Almost one-third (31.3 percent) of independents prefer to buy licenses and host the software Themselves.
The two next most currently used applications are geared toward boosting sales and saving money. Just over 45 percent of those surveyed say they’re using or installing merchandising applications, which are most likely to provide an assortment mix that increases their relevancy in the face of growing competition. Immediately following are loss prevention systems, used or being installed by 43.2 percent of independents. These systems were considered high priority by more independents than any other type of application, which is consistent with the cost-savings mindset among retailers in today’s economic Climate.
Indeed, in the wake of the much-reported Hannaford data breach and Stop & Shop PIN pad thefts last year, the 16.7-point jump (to 76.9 percent) of independents using loss prevention technology to address theft isn’t surprising (Table 7c). Other issues addressed by loss prevention solutions, such as (cited by 61.5 percent of respondents), receiving (60.8percent), and shrink (52.3 percent), were fairly consistent with last year’s Responses.
Right below loss prevention on independents’ high-priority list are shopper information kiosks, which are seen as an enhancement of service in an increasingly service-oriented industry. Many provide mealplanning or wine-pairing tips for younger shoppers with little cooking experience. And since many frontline employees are from this age group, it helps expand their meal preparation knowledge base as well. While only 8.3 percent of independents are currently using or installing these kiosks, that number is likely to grow in coming years to meet these consumers’ growing demand for information.
Electronic payment technologies continue to grow in importance as we move further away from cash, and of these various payment technologies, in-house or private gift cards top the list in deployment, according to those independents surveyed, and are used by more than half of them. Complementing these devices is credit-to-debit conversion automation. Especially in today’s economy, retailers are looking to slash costs at every turn. Credit-todebit conversion is used to switch customers from higher-fee credit card payments to lower-cost debit card payments – primarily by asking for a PIN whenever a debit card is swiped, forcing the customer to take the extra step of opting out to use a credit card. These systems are currently being deployed by 35.4 percent of independents (Table 8).
The cost of security Cost is, and probably always will be, the chief barrier to technology deployment among independent grocers: Almost half (48.8 percent) of those surveyed cited it as such. While the economy will play a role in fortifying this barrier in 2009, PCI compliance is also playing a role, as many retailers have had to shelve planned IT projects to bring their systems up to speed for this year’s deadline. But independents have many unanswered questions about PCI compliance, such as how to budget for it, how secure it must be, and how it will change from year to year. Especially in the wake of the Hannaford data breach, many independents wonder if it’s at all possible to be 100 percent secure (Table 9).
Wholesalers play an increasing role in independents’ technology initiatives in terms of strategy, but fewer are getting involved with the nuts and bolts of installation and maintenance. Sixty-five percent of those surveyed receive recommendations from their wholesaler about what technologies to implement, up from 60.3 percent last year. Onequarter of respondents have solutions implemented by their wholesalers, a slight decline from 2007. Almost 5 percent fewer are acting as an independent software vendor that handles the physical deployment and upkeep of retail systems (Table 10).
One light at the end of the economic tunnel is that fewer independents (14.2 percent) find it tougher to measure an accurate ROI for new technologies than they did last year (20.3 percent). This is a sign that independents are showing greater confidence in newer technology and applications, and will possibly look to pilot more cutting-edge solutions in the coming year – and this may be just what some need to do to stay one step ahead of the economy.
Who they are While the percentages may change from year to year, the comparative ratios of respondents are the same, with the Midwest contributing the most, and the West Coast having the least respondents (Table 11). Thirty-eight percent represent companies located in the Midwest, almost one-quarter (21 percent) of respondents are in the Northeast, 19 percent operate in the West Coast, and 14 percent are in the South.
The average respondent operates more stores (4.8) than those surveyed last year, who reported operating an average of 2.8 stores. As with last year, more than half (53.9 percent) of those surveyed operate one store, while 14.5 percent ran two stores. 15.1 percent have from three to four stores, and 16.5 percent operate five or more stores (Table 12). Of these grocers, most – particularly those single-store operators – don’t plan to add stores in the near future. Overall, 73 percent of independent grocers don’t plan to add any stores at all within the next year, and this number will only change slightly over the next three years.